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In the paper on Portfolio Selection, printed in Critical Essays in Monetary Theory, Hicks followed what has become the conventional approach, supposing that the ‘prospect’ of each available investment could be expressed in terms of the first two moments of a probability distribution (e, s). There is also a passage, in that same paper, in which Hicks examined the alternative ‘Bernouillian’ approach to risk-bearing; an approach which has the obvious merit that it imposes no restriction upon the ‘shape’ of the prospect, as does the (e, s) approach, at least in effect. He nevertheless rejected...

In the paper on Portfolio Selection, printed in Critical Essays in Monetary Theory, Hicks followed what has become the conventional approach, supposing that the ‘prospect’ of each available investment could be expressed in terms of the first two moments of a probability distribution (e, s). There is also a passage, in that same paper, in which Hicks examined the alternative ‘Bernouillian’ approach to risk-bearing; an approach which has the obvious merit that it imposes no restriction upon the ‘shape’ of the prospect, as does the (e, s) approach, at least in effect. He nevertheless rejected that approach, not on account of its adherence to ‘cardinal utility’ but for another reason. In the particular case of a linear marginal utility function — the only case where it is easy to build a bridge between the (e, s) theory and the Bernouillian theory, so that either approach is applicable — absurd results are obtained. This chapter gives the Bernouillian approach some further consideration.